Risk pays off
|Restrictions in traditional lending and credit markets have helped 57-year-old Republic Finance thrive with subprime loans.|
Between the recession and financial-industry turmoil, borrowing has become harder than ever at a time when, for many, it's more necessary.
But those tougher regulations over banks and lending institutions and lackluster economic conditions have helped fuel the explosive growth at Republic Finance, a Baton Rouge-based lending house that makes subprime loans to high-risk customers.
Last year, the 57-year-old company's revenues increased 27% to nearly $73 million from just over $56 million in 2010, and it jumped to No. 45 on the Top 100 list of private companies, from No. 53. What's more, it has opened 60 new branches since 2005, seven of them in the first six months of 2012, and now has more than 100 locations throughout the South, with plans to open at least seven more before the end of the year.
“Paradoxically, the economy has really helped us,” explains Rex Ellison, Republic's president and chief operating officer. “Plus, with the restriction in credit from the banking industry, we've been able to attract more customers.”
Company executives insist Republic Finance is not a predatory lender. The company goes to pains to differentiate itself from payday lenders, which typically lend no more than $200 at 500% interest or so to customers who have to repay it within two weeks. By contrast, Republic is an installment lender that makes loans of $3,000 on average that can be paid back over 12, 24 or 36 months.
“We try to set the amount and the terms to fit within the customers' budgets,” says Republic's CEO Gary Phillips. “Many of our customers have credit union options. But the banks have cut back on credit card availability and the size of credit card lines.”
That's a far different lending climate than back in the 1950s when Phillips' father, the late Andy Phillips, began working at Republic Finance. He worked his way up through the ranks, purchasing the company from his partners in 1982 and running it until his death in1989. That's when Gary Phillips took over.
In 2001, Philllips brought in Rex Ellison, and together they have helped Republic Finance grow, not only by capitalizing on changing market conditions, but by utilizing high-tech data analytics. That means they have at their fingertips much more sophisticated, detailed and cross-referenced information with which they can analyze potential customers and their credit-worthiness—or lack thereof—and then adjust the terms of the loans to maximize profitability and minimize bad debt.
“The technology is a lot better, and that has allowed average loan size to increase as well as the type of loan we can make,” Phillips says.
That technology has also made it easier for Republic Finance to target potential customers. Since the mid-2000s, the company has partnered with a variety of different credit sources that have helped lead it directly to people who need to borrow money.
“We do a lot of mail marketing campaigns to attract those customers to us,” Ellison says.
REPUBLIC FINANCE AT A GLANCE
2011 ranking among Top 100 firms
2010 ranking among Top 100 firms
Because those potential customers have few other credit options, they're somewhat over a barrel—and pay dearly if they borrow. Lending rates at Republic Finance range from 23% to 40% on average, and that's amortized monthly. In other words, a customer who borrows $3,000 over 24 months will end up paying $1,251 in interest alone, according to Phillips. That's a total of $4,251, or $177 a month.
Critics of predatory lending say while Republic may consider itself a cut above payday loan houses, they see little difference, especially when interest rates start approaching the 40% range.
“The FDIC recommends capping loans at 36% interest, so I'd say that's incredibly high,” says Tim Mathis, an analyst at the Louisiana Budget Project who has studied payday lending. “I'd certainly question some of these practices.”
Republic's executives, however, are unapologetic. Phillips points out his company's fixed interest rates have no hidden costs or balloon payments due at the end of the term. What's more, he argues, there is a misperception about how personal, installment loans are structured. Basically, the smaller the loan, the higher the APR, which Phillips says is because of fixed costs in borrowing.
“The rate on a percentage basis may be high,” he says. “But the actual cost is not that high. It sounds expensive to say 36%. But if you're only talking $35 or $40 a month in interest payments, that's not that much.”
Besides, he says, because the company's customers are high-risk, there's a need to cover the inevitable bad debt that will follow. Though Republic's red ink is what company executives describe as manageable, it's still more than what it used to be.?“When I first started working in this business, our bad debt was around 2%,” Phillips says. “Now it's between 6% and 8%.”
Still, Phillips and Ellison are bullish on their company's future. Republic Finance currently has some 110,000 customers, who have collectively borrowed nearly $250 million.
They reside throughout the South; the company has locations in Louisiana, Mississippi, Alabama, Georgia, Tennessee and South Carolina, and plans to open 20 more new locations next year and branch into a seventh state. They believe the need for their products is unlimited, though they concede that overcoming negative perceptions will be their biggest challenge.
“For most people you're either a bank lender or a predatory lender,” Phillips says. “They don't realize there is another option. Marketing and education are a big part of what we do.”
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